Confronting Sir Nick Montagu, chairman of the Inland Revenue

The Tax Journal, September 1 2002

Let us get to the truth.

Sir Nick Montagu has defended the Inland Revenue like a man accused of murder who clambers into the witness box and denies that he parks on double-yellow lines: quite probably accurate, certainly good news but entirely irrelevant to the charge.

Let us get to the truth that matters. In two long and detailed articles in the Guardian, I have accused the Inland Revenue of allowing its compliance effort to descend into a state of virtual collapse under the weight of its historic under-funding and mismanagement; and, beyond that, of bending the law to give special favours to the largest corporate tax payers in a strategy which is cowardly, costly and grossly unfair to the rest of us.

Sir Nick’s reply simply bypasses the complaint and recycles his standard speech about the joys of ‘enabling as well as regulating’ – customer relationship management, joined-up internal systems, outreach to customers, links to communities. Fine. I am sure too that his car is properly parked.

Sir Nick is not going to win the argument with me – or, I suspect, with anybody else who knows what the Inland Revenue is doing – unless he deals with the evidence. And I want to make it clear that my complaint is directed not at the tax inspectors on the front line, but at the strategy of the board of the Inland Revenue, chaired by Sir Nick. So, here and now, I challenge him to tell us the truth about the following sample points:

As an example of the trouble in the Revenue’s compliance regime, I say that the collection of unpaid National Insurance has fallen sharply. For the year to March 2000, the Revenue’s annual report showed that £259 million had been identified under this heading, but the annual report to March 2001 gave no figure at all. Tell us, Sir Nick: what is the missing figure?

As an example of the rule-bending for large corporates, I say the Revenue is not charging them penalties in the way that it does with other tax payers. Tell us, Sir Nick: how many large corporates were subjected to penalties by the Large Business Office and the Special Compliance Office, in the 12 months to March 2001? And what did these penalties total? And, if you really want to deal with the complaint, tell us how those figures compare to the number and total of penalties imposed on small businesses and individuals.

Again, as an example, of compliance chaos, I say that the 1996 Spend-to-Save initiative, which was supposed to yield an extra £2 billion in undeclared tax over the following three years was a monstrous failure; that the total yield from compliance during that period rose by only £457 million, much of which was accounted for by International which was not a prime beneficiary of Spend to Save; that the Special Compliance Office, which was one of the principal beneficiaries, actually went into decline. Tell us, Sir Nick: has the Revenue audited the results of the Spend to Save initiative and will you publish its results?

Will you tell us how many cases were settled by the SCO and by the LBO in each of the last two financial years? Will you tell us the complement for fully trained inspectors in the Revenue for the current financial year and what was the comparable figure for 1985, 1990 and 1995? Will you give us the same figures for the complement of general grade inspectors for those years? Will you tell us, in respect of both fully trained inspectors and general grade inspectors, the number of unfilled posts at June 30 2002 and at the same date in 1985, 1990 and 1995? How many full and aspect business inquiries were taken up and settled in each of the last two financial years? Would you like to tell us how many taxpayers have been prosecuted for the new offence of fraudulently evading income tax?

It is just not good enough for Sir Nick to say he doesn’t know the answers. And it is certainly not good enough to pretend that no answers are necessary. As the Revenue’s own report on New Performance Measures for Compliance puts it: “What gets measured gets done. If you don’t measure results, you can’t tell success from failure.. If you can’t recognise failure, you can’t correct it.”

As things stand – in the absence of detailed and verifiable answers to these sample questions – the evidence against the board of the Inland Revenue is overwhelming.

The evidence of rule-bending in favour of large corporates is plain in black and white in the Revenue’s own paperwork. While one of Sir Nick’s colleagues assured me in writing that large corporates were paying penalties just like any other tax payers, the Hartnett Review was referring quite openly to the general reassurance which had been given to large corporates “that penalties will be reserved for the most serious cases”. Who else but the large corporates has been given such a promise? Similarly, the minutes of meetings of the Large Corporates Forum are explicit, for example, about the reduction in transfer pricing inquiries in spite of the evidence that large corporates regard this as their leading tax risk; and on the concessionary cut in interest rates for late payments by large corporates, unavailable to smaller businesses or individuals.

The evidence of the calamitous decline in the Revenue’s compliance performance is just as plain from the Revenue’s annual reports. The success rate of the compliance effort is now back at the same level it reached nine years ago – although nine years ago, the national tax bill was only a third of its current size. The yield for every single specialist compliance department has fallen: the Special Compliance Office was collecting £20 for every £1 it spent, but now it collects only £15; the International division was collecting £188, now it collects only £96; the Oil Tax Office was collecting £176, now only £29; the Special Investigation Section was collecting £121, but now collects only £67; the Large Business Office was collecting £119, now only £75. There is something very badly wrong with the management of any organisation which delivers such a powerful pattern of decline.

Many of the problems which have brought us to this crisis began years before Sir Nick arrived at the Inland Revenue. What Sir Nick brought to the Revenue was a startling innovation – the conversion of failure into a target. Rather like a defeated general who surveys the wreckage of his campaign and who declares that although he remains dedicated to victory, he now wants his army to be seen primarily as a grave-digging organisation, Sir Nick has greeted the decline of the Revenue’s compliance work by declaring that, although he remains dedicated to regulation, he wants the Revenue to be seen primarily as an enabling organisation.

Suddenly, the goal posts are on the move. No more measuring of the number of settlements or the number of take-ups. No more pretence, in fact, at measuring anything designed to reflect what is really happening with compliance inquiries. According to the Revenue’s paper on New Performance Measures for Compliance: “We need to adopt a new approach to performance measurement that will show us and our customers that we are meeting our business goals and objectives.” (Read that twice: the Revenue board really are saying that they are rewriting the rules so that they always appear to be winning.)

Of course, there have been many within and without the Revenue who have said that this philosophy of enabling as well as regulating is naive; that it relies on an assumption about the willingness of taxpayers to comply which is certainly a fantasy; that it leaves the compliance departments feeling undervalued as well as underfunded. Sir Nick had the answer to that: the United States, he said – look at the success of their ‘voluntary compliance’ effort. That was last year, of course, before this year’s report by the US General Accounting Office which found that the policy had produced ‘large and pervasive declines in just about every compliance department of the Internal Revenue Service. (Does that sound familiar, Sir Nick?). This month, the IRS commissioner, Charles Rossotti, admitted that there was “mounting evidence of cheating that the agency was failing to detect”.

And why wouldn’t there be? In Japan, the National Tax Administration says corporate tax evasion has been rising; Revenue Canada has found that “many active corporations are paying little or no tax” and 64% of companies with gross annual revenue of up to $15 million are paying zero tax; the Foundation of Economic and Industrial Research says tax evasion is rising in Greece; the Australian tax commissioner is calling for new powers to deal with high-income evaders; the former head of the Argentinian tax agency says tax evasion has been rife and getting worse for years. Why wouldn’t UK tax payers be just as keen to cheat? Does anybody outside the boardroom of the Inland Revenue believe that tax payers are willing to pay their full bill if only they are enabled to do so; that British tax payers are the most honest in the world?

Sir John Bourn, head of the National Audit Office, introduced last year’s report of the UK Fraud Advisory Panel with the words: “Fraud is virulent and pervasive.” The head of the UK Serious Fraud Office, Rosalind Wright declared recently: “The problem is very large and growing” and went on to describe the legal and financial facilities of the City of London as “an invitation to fraudsters and money launderers.” Customs and Excuse have set up a new monitoring system and found VAT fraud is running at £7.3 billion a year.

The Irish tax commissioners might conceivably have shared Sir Nick’s view until the lid was lifted on the private Ansbacher bank in the Caymans and it was revealed that more than £100 million of income and capital had been diverted into secret accounts to the detriment of the Irish exchequer.

The evidence, which remains uncontested, is that dishonest individuals and powerful corporations are running rings around the Inland Revenue – and its board are making it more difficult for long-suffering compliance staff to stop them. It’s a shambles, Sir Nick. Isn’t that the truth?